Intel (NASDAQ:INTC) needs more than superficial changes. The failure to keep up with Taiwan Semiconductor (NYSE:TSM) at 7 nm has shaved nearly 20% off the stock price. Those losses aren’t coming back right away. Intel stock opened for trade Sept. 8 at $49.70 and a market cap of $213 billion.
But while rival chip stocks such as Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) were hammered in a pre-Labor Day “tech wreck,” Intel shares barely budged.
They were already cheap. Intel is the only American chip company today with a price-earnings ratio below 10. It is still paying you to own it, a 66 cent per share dividend yielding 2.64%. Intel is still conducting share buybacks.
Ringing the Changes
Hedge funds are still buying Intel stock , hoping that the recent quarter has finally gotten management’s attention.
It already has, in the superficial ways analysts like. Intel has changed its branding, getting rid of the circle enclosing its name, putting in a new typeface, even changing the “bong” sound in its commercials.
Intel’s new Tiger Lake processors have graphics integrated into them, along with WiFi 6 support and longer battery life. This means cheaper, and better, mass market PCs. The next generation, a 10 nm chip dubbed Jasper Lake, will continue the trend toward low power, a design that works in computers without fans. Intel is also rolling out a new line of Field Programmable Gate Arrays (FGPAs), key components for the machine internet.
The biggest change is on the manufacturing side, where Daniel Benatar, who had been running Israeli operations, was named assistant general manager for all manufacturing. This comes just months after chief engineer Venkata “Murthy” Renduchintala, once a candidate for the CEO position, was shown the door. Jim Keller, vice president of the silicon engineering group, also left during the summer.
These moves, and the stock’s low price, have some analysts pounding the table for Intel. They point to the company’s R&D budget, its success in the data center, and the break-up of its technology group, which now has five executives competing to be the next chief engineer. As the second-quarter report showed, Intel is still making money.
The Bear Case on Intel Stock
Bears still have ammunition. They compare Intel to the International Business Machines (NYSE:IBM) of 25 years ago. Lou Gerstner turned the company around, until the cloud era, and IBM’s insistence on dividends and buybacks crashed it in the 2010s.
The problem here is one of margins. Intel dominates low-margin businesses, only showing large profits because of its high volumes. Delays in an Intel supercomputer being bought by the Department of Energy are troubling.
Apple’s (NASDAQ:AAPL) decision to dump Intel silicon, to buy its modem business and make its own processors, is also wearing on the stock. All the Cloud Czars now have the capital needed to design their own high-end silicon. Alphabet (NASDAQ:GOOGL), Amazon.Com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) are all in the game, and have the financial firepower to blow Intel out of the water.
The Bottom Line
Hardware is software, and the cloud is making software a commodity.
I recently sold half of my Nvidia and put the profits into Intel because of this. It’s not that Intel is a threat to Nvidia at the high end. It’s that Intel’s weaknesses can be designed around, while its cheap chips still offer the price performance the next decade’s markets need.
Clouds buy price performance, not just performance. So do most PC buyers. So do most product designers. The low-margin businesses Intel still dominates are going to grow, giving Intel the time needed to save itself on the manufacturing side.
On the date of publication, Dana Blankenhorn owned shares in AMZN, AAPL, TSM, MSFT, NVDA and INTC.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
